The Follies of Central Bank Watchers …

I am continually amazed at how many investors and analysts hang their investments and/or trade decisions on what the Fed does or doesn’t do, says or doesn’t say.

As if the Fed controls the markets! Or any central bank, or combination of central banks for that matter!

Simply put, central banks have no impact on an economy or on market trends. None at all. Period.

At best, all they do is …

A. React to the economy and markets. And/or sometimes …

B. Get lucky and make a policy change or a verbal statement that tends to coincide timing-wise with what an economy or a market(s) is already set to do.

Let me dissect each of the above for you, by way of examples.

Reacting to the economy and markets

The Fed merely reacts to what’s already happening in the free markets.

Do you think interest rates go up because the Fed raises its official rate? Or that they fall because the Fed lowers its official rate?

If you do, then it’s time for you to learn a very important lesson: The Fed, or any other central bank for that matter, merely reacts to what’s already happening in the free markets.

If people, investors, and businesses are borrowing money, and that demand exceeds the immediately available supply for money or credit, then interest rates — the cost of borrowing — go up. Whether or not a central bank likes it.

Conversely, if money and credit are contracting because demand is weakening, then interest rates fall — again, regardless of what a central bank may want to see or happen.

Just consider the stock market collapses of 2000-01, 2003, or 2007-09.

What happened? Interest rates collapsed because credit was contracting and new demand for credit was also slumping. The Fed had nothing to do with it at all. All it did was follow rates lower by notching down its official discount interest rate.

Or consider the last several years of record low interest rates. Do you think they are low and heading lower in many parts of the world because central banks say so?

No, rates are at historical record lows because there is virtually no demand for money and credit.

Or consider the late 1970s, when interest rates were soaring. Stocks and commodities were booming. Credit demand was off the charts. Investors were willing to pay any rate of interest to invest in anything that had a shot at matching or bettering high inflation rates.

So interest rates went up together with most assets and the Fed could do nothing more than raise its official rate in tandem.

Markets and interest rates only peaked, not because Fed Chairman Paul Volcker raised rates to 20 percent in June 1981, but simply because that particular inflation cycle was due to end anyway.

Anyone who thinks or tells you otherwise is merely a rookie in the markets, or if they have any experience at all, is simply ignorant of how markets work.

Or consider last week’s Fed meeting and press conference, which in my opinion is the epitome of Fed follies and an amazing show of how there are so many investors and analysts who get caught up in watching the Fed.

At last week’s meeting and press conference, Chairwoman Janet Yellen removed one single word from the Fed’s official press release — the word “patient” — giving the impression the Fed was more ready to raise rates.

But then, in other wording in the press release, the Fed noted it “would not be impatient” raising rates either — giving the opposite message, that it would take its time raising rates.

And what did the bond markets do? Rates actually declined. Traders who bet that rates would rise due to the removal of the word “patient” got their heads handed to them …

While traders who bet on declining rates — which is the free market trend still in force now — made a couple of bucks.

I could go on and on with one historical example after another from the beginning of time, but the fact is this: Central banks have zero control over interest rates.

Anyone who thinks otherwise, I repeat, is simply a rookie, or completely ignorant of how markets work.

Now, let’s consider my point B, where a central bank may get lucky …

And make a policy change or a verbal statement that tends to coincide timing-wise with what an economy or a market(s) is already set to do.

This doesn’t happen all that often, but it happens enough that it leads many investors and traders astray.

Consider what I just told you about Paul Volcker in 1981. Many credit him with killing inflation back then by dramatically raising rates.

Not true. That inflation cycle was due to die off in June 1981 anyway. Volcker was merely lucky. He was in the right place at the right time.

Or consider again, last week’s Fed meeting. As I have been telling you, the euro was overdue for a bounce, the dollar for a correction, and gold and silver for a short-term pop higher — and that’s exactly what happened last week.

Did the Fed cause it? No way. The Fed merely reacted to the markets. The dollar would have sold off, the euro would have bounced along with gold and silver no matter what the Fed said or did.

It’s crucial that you understand this. The majority of investors and traders make their decisions on erroneous information and central bank watching and guessing. Do that and you are destined to never become a successful investor or trader.

Instead, focus on what the free markets are doing, what the major, big picture trends are, and on the charts. They tell you everything you need to know. And the facts right now are …

1. Interest rates are not headed higher for some time.

2. Deflation still rules.

3. The dollar remains in a long-term uptrend, the euro in a massive long-term bear market.

4. Commodities, nearly all of them, remain in bear markets.

Best wishes, as always …

Larry

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader.

Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

{43 comments }

JonWednesday, March 25, 2015 at 8:30 am

5. You don’t have a clue where the s&p is going

wereWednesday, March 25, 2015 at 8:58 am

Finally a blog by Larry where I agree with everything that he says. Way to go Larry for using “chairwoman”; so politically incorrect of him. People always call her a “chair” – she’s not a chair, she’s a chairwoman.

wereWednesday, March 25, 2015 at 9:03 am

Ah, I was too quick and missed point 4. Sorry, commodities have entered a bull market into the summer. I was waiting for beginning April for the long term low – but this recent low was it. The “waterfall” is over.

HeidiFriday, March 27, 2015 at 1:14 pm

were I can’t believe it – you are so totally correct . I just read Armstrong’s letter today exactly what he wrote is what you said March 25 . The biggest BANG ( $$$$ ) will be oil ……gold up, euro up, oil , USD down and at least into the summertime ….holy bambino !!! How did you get to that ? Somebody smarter than Armstrong ? And yes the waterfall is done .http://armstrongeconomics.com/2015/03/27/markets-in-review/
I hope a lot of people will read this and believe you too .

wereFriday, March 27, 2015 at 1:50 pm

I don’t think I’m smarter than Armstrong. But I know that he’s not the only one that can figure out how the markets will most likely behave. I worked this out back in 2009 and have been surprised ever since – getting more and more confident as the targets hold true. I even sent Armstrong some of my info hoping to show him it doesn’t take a computer to do this – but I never heard back from him. I’ll just have to be happy giving Larry a hard time.
btw. expect a short term correction over the next few days in commodities before the next strong leg up

TrevieSaturday, March 28, 2015 at 10:19 am

Armstrong does not seem clear on his gold prediction. Gold could not get over 1240 let alone 1256 on the weekly and soon monthly basis. It has already had a reaction rally that seems to be coming to an end – if so this will complete a nice head and shoulders pattern into April – anniversary month of the great gold collapse in 2013.

TrevieSaturday, March 28, 2015 at 10:22 am

Also look at the weekly Macd for oil and gold – they are opposite each other this time. Why? Cause gold and oil rallied inversely since Nov. Oil up and gold down into April is my prediction.

sidWednesday, April 1, 2015 at 1:09 am

she’s a chairman. everybody’s favorite shemale.

FredWednesday, March 25, 2015 at 9:57 am

Larry, you had inverse funds up 10% last week. by the time your article printed they were down 2%. now about 4%.

HowardWednesday, March 25, 2015 at 10:18 am

Hi Larry

It is to be remembered that the FED is a composition of private banks with the very clear intent of making money. With the aide of useless administrations the FED has taken it upon itself to print trillions of dollars. It is their clear goal to maximise their margin in the middle with least harm to the economy. What a combination. Bloated bureaucratic governments that don’t make necessary decisions and the FED to screw us for margin increases when they can. We soon have a chance to vote for change.

jrj90620Wednesday, March 25, 2015 at 12:34 pm

I’m wondering why Larry bothers helping us.Anyone with as much knowledge and accurate timing as Larry,should be worth more than Buffett,who admits he can’t time the markets.Larry,with assumed $billions in wealth should be able to find other pursuits,more interesting than helping us.

SteveWednesday, March 25, 2015 at 2:52 pm

I absolutely disagree 1000% with Larry’s comments. I don’t even know why I sub. as he & I are totally 180. To say the fed does not control the markets (trading desks are there just to look nice I guess) is beyond belief as the world earns zero if not negative interests rates because of the fedsters trillion dollar purchases. To say gold smack downs in the early chinese morning done by traders who like to lose money is not the CB’s is asinine. They admit they trade futures etc. So many banks have been “fined” for controlling & manipulating almost EVERYTHING. BofJ is now buying ETF’s & shortly moving into individual stocks. I really think Larry you are a plant by CB’s but what do I know as I’m “just a rookie”!

MikeMonday, March 30, 2015 at 11:47 am

Agreed. I see the same.

Al McNalWednesday, April 1, 2015 at 10:01 pm

Have you ever looked at charts showing timing of rate increases and decreases. The Fed ALWAYS follows increases and decreases in market rates.

BFDWednesday, March 25, 2015 at 3:05 pm

Quote from Larry’s letter, today: “Simply put, central banks have no impact on an economy or on market trends. None at all. Period.”

Is he kidding? Of course it does!

Isn’t this the same guy who told us about the FED printing all this money to make the markets go up? I believe that Larry is actually smarter than what he said in today’s newsletter. Of course the FED has an impact on the markets – look at the last six years. During that same period, look at the times when there has been fear that the FED would raise interest rates and how the market tanked; until “the market” figured out that the FED would not be raising rates, and then the market went up again. Remember the “Taper Tantrum”? The FED does not “control” the markets, but indeed influences the markets, who in turn “control” the markets via buying and selling. The FED indeed does have an impact on the markets!

Larry, you can do better than today!

wereWednesday, March 25, 2015 at 4:35 pm

The FED studies cycles. Do they create the cycles or are they a slave to existing cycles? Hmmmmm…….

SteveWednesday, March 25, 2015 at 4:39 pm

the fed has been the markets for the last 6 years

BFDWednesday, March 25, 2015 at 4:56 pm

Steve – Well said!

Larry is not a rookie, but he sure sounded like one today – like it was his first day on the job.

SteveWednesday, March 25, 2015 at 4:56 pm

Looks like time for some more fed speak, can’t have any down days, markets must go up!

SteveWednesday, March 25, 2015 at 4:59 pm

Fed stick save by Friday & another gold smack down

SteveFriday, March 27, 2015 at 1:22 pm

& we got it Friday – have to keep the price down – see Volker below & now Goldman’s peak gold!

MephistoFriday, March 27, 2015 at 10:53 pm

you make no sense

SteveWednesday, March 25, 2015 at 5:01 pm

Larry, I guess Open Market Operations are just a fairy tail????

FollyWednesday, March 25, 2015 at 6:12 pm

Naive, are you saying that all this quantitative easing by the Feds, has had no effect on the markets. Your living in dreamland.

HeideWednesday, March 25, 2015 at 7:05 pm

So what Larry is saying in this article is all the Fed has no effect on the markets at all, which means all the money printing the Fed did won’t hurt the dollar ???

saintWednesday, March 25, 2015 at 7:12 pm

larry is wrong, wrong, wrong. the fed absolutely controls the interest rate. the fed funds rate is completely controlled by the fed. it is the 3 month rate. raising the short term rate higher than the long term rate shut down the credit markets because banks have to borrow from the fed at a higher rate than they can lone to the public. go back to school larry.

phoneeWednesday, March 25, 2015 at 8:08 pm

14. The overall performance of Weiss Research’s premium services did not support these profit claims. In fact, during the relevant time period, many subscribers who followed each Weiss Research trading recommendation – as Weiss Research encouraged its subscribers to do – experienced overall returns that were substantially lower than Weiss Research’s profit examples and most actually lost money. Although Weiss Research disclosed to subscribers that losses are possible, it did not include information on specific losing trades or disclose that, for the most part, its premium services newsletters had not been profitable for subscribers.

BFDWednesday, March 25, 2015 at 8:31 pm

You know, this guy really has no idea what he is talking about. I said in a prior post that I believed he was smarter than what he said in his article. I was wrong! This guy is so wrong that you cannot even use him as a contrarian indicator, as he is just too erratic.

john a canadianWednesday, March 25, 2015 at 11:04 pm

Larry: watch what your dollar will do this month, with Canada not using the us. dollar to trade to china any more. Since the reminibi opened the hub in Toronto Canada yesterday. Mar.24/2015 Canada trades directly with China market without using the us. currency
so no more purchase of us. dollars for trade this saves exchange costs. this means money. and Canada is thinking about joining the Chinese market so Canadians can trade/ borrow/lend direct to the Yuan. this is serious for the us. economy. you are printing too many dollars still. So the FED has still not got it yet. the high buck makes it possible to purchase more at a lower rate outside the country, GOOD. BUT no one will purchase US goods, there too expensive . 20 % exchange too many dollars in circulation this is bad! What’s going to happen to the fed. dept. it’s sky hi.

HeidiThursday, March 26, 2015 at 10:35 am

john a Canadian ….do you really think that this will impact the US economy at all if Canada trades less with the US and more with China ? The little brother has a population of ???? 33 mill . ? ???? or 36 mill. people and the States have over 360 MILL. people – it’s laughable what you wrote isn’t it ?
Also a Canadian !!!!!!!

SteveThursday, March 26, 2015 at 12:00 pm

I think john is alluding to the fat that the world marches on replacing or at least providing another means for not using the US dollar & all it’s expensive exchange rates. China / Russia / Bricks new bank to rival the IMF & World Bank (now joined by major players) even the US how tried to kill & slow down this “conversion” but failed. The days are numbed for the US to print to infinity because of the RC stasis it enjoys & grossly abuses. Imagine a world controlled by a few unelected people who cannot even be audited – it’s scary

?????Thursday, March 26, 2015 at 12:06 am

When the U.S. dollar bubble bursts, I wonder what they’ll blame then for gold continuing to tank? ….I guess they’ll say it’s due to just plain old-fashioned “deflation.”

Rob,.Thursday, March 26, 2015 at 5:20 am

No, rates are at historical record lows because there is virtually no demand for money and credit.- Laa Laa Larry,.

Before it get’s forgotten Gold reached $ 1220 this week !!!
Yes, I know I won another bet .

BFDFriday, March 27, 2015 at 5:19 pm

Heidi – Another great call, eh? You didn’t know I spoke Canadian . . . did you?

How does Larry subscribe to your newsletter? He needs help after his fiasco this week. All his “fans” seem to be on vacation this week!

HeidiSaturday, March 28, 2015 at 3:45 am

BFD another Canuck, eh ? Smart people for sure ! Did you read all that important stuff from Armstrong ?
1 ) Euro up
2 ) USD down
3 ) Gold up
4 ) Oil up ….. more than gold ? But not to $ 89 – no way …my new bet against Armstrong .
Watch what ” were ” writes .

All going up until June – summer time

HeidiFriday, March 27, 2015 at 1:16 pm

Read the stuff were wrote Mar. 25th and my comments underneath it with a link to Armstrong’s article IT’S A MUST !

$1,000 goldSaturday, March 28, 2015 at 5:24 am

deflation will cause “things” to become cheaper, while your power of your dollars in the bank remains the same. i can’t think of a better place to be in a deflationary environment than the dollar.

jrj90620Saturday, March 28, 2015 at 11:39 am

Yeah.ALL fiat currencies decline,over time.The Dollar has declined over 96% against money(gold),since the founding of the Fed,in 1913, and that decline has accelerated as govt deficits have risen.So hang on to those Dollars and get rich?

$1,000 goldSaturday, March 28, 2015 at 2:09 pm

it would seem that way. dollar would still be a dollar, but assets would deflate.

$1,000 goldSunday, March 29, 2015 at 9:18 am

inflation would do the opposite. assets would get expensive while the dollar remained the same, not weaken, eroding your buying power. a dollar is still a dollar either way.

$1,000 goldSunday, March 29, 2015 at 9:22 am

if you have $100,000 in the bank and a mortgage of $100,000, you’ll always be able to payoff your mortgage no matter how much inflation or deflation there is. the dollar does not strengthen or weaken, it always stays the same. it’s the value of assets that change.